Enrolled in Medicare? You Can't Back out to Fund Your HSA.*

* Only a very small percentage of Medicare Part A enrollees are eligible to disenroll to continue funding a Health Savings Account. Chances are excellent that you're not among this handful.

No Health Savings Account topic is more confusing than the intersection of these financial accounts and Medicare coverage. This observation was reinforced last week when an industry colleague asked me to weigh in on a compliance question. One of his company's account owners had talked to a Social Security representative and was convinced that he could disenroll from Medicare Part A (which covers inpatient, skilled-nursing, home-health, and hospice services) and become eligible to fund his Health Savings Account.

Unfortunately, it's almost impossible to disenroll from Part A once you're enrolled. This door opens only if you pay a premium for Part A coverage. And unless you're one in a hundred Part A enrollees, you pay no premium.

Medicare and Health Savings Accounts

The original Health Savings Account legislation (coincidentally, a bill that also created a Medicare prescription-drug benefit) is clear that anyone enrolled in any Part of Medicare (referred to as Section XVIII of the Social Security Act, where Medicare legislation is housed) is disqualified from funding a Health Savings Account:

Internal Revenue Code Section 223 (b):

(7)Medicare eligible individuals

The limitation under this subsection for any month with respect to an individual shall be zero for the first month such individual is entitled to benefits under title XVIII of the Social Security Act and for each month thereafter.

Thus, Medicare coverage is disqualifying. Note the qualifier: coverage. You're not disqualified from opening and funding a Health Savings Account for any month that you're Medicare-eligible, which for most Americans is the first day of the month of their 65th birthday. But you are disqualified from making or receiving contributions when you're enrolled on/covered by Medicare.

Social Security and Medicare

If you're age 65 or older and collecting Social Security benefits, you're automatically enrolled in Medicare Part A and Part B. You can waive Part B coverage (which carries a premium of at least $174.70 in 2024) by calling your local Social Security office.

If you are (or your spouse who covers you on his company's plan is) still working for a company with 20 or more employees and covered on an employer-sponsored plan, you will probably disenroll from Part B to avoid the monthly premium. It's not difficult to disenroll. And if you sign up promptly for Part B when your coverage on the group plan ends, you face no penalty or premium surcharge for delaying your enrollment.

But you can't decline or disenroll from Medicare Part A if you're collecting Social Security benefits. In the 1990s, during the Clinton Administration, the Medicare Program Operations Manual System (as the name implies, the blueprint for Medicare administration), or POMS, was revised to include this provision that Social Security enrollees faced mandatory Part A coverage.

Thinking of challenging this provision in court? You could. But three plaintiffs, including former House of Representatives majority leader Dick Armey (R-TX) tried that approach more than a decade ago. They sued the Secretary of Health and Human Services because they wanted to collect Social Security benefits but didn't want to be enrolled in Medicare, which interfered with their private coverage. They lost their case in district court. They appealed to the US Circuit Court of Appeals for the District of Columbia and lost again, this time in a 2-1 decision authored by then-Judge Brett Kavanaugh.

Thinking of demanding that the next president change the rule? Administrative law (created by the executive branch, rather than Congress through the legislative process) can be altered by a future president. The process is often drawn out. Given a court decision affirming the link between Social Security and Medicare enrollment in POMS, a change may require congressional action.

Discriminatory Impact

Some members of Congress have been trying to change the law for years, not by hanging the POMS, but rather through legislation permitting people covered by Part A (and no other part of Medicare) to remain HSA-eligible. In fact, a bill that includes this provision cleared the House Ways & Means Committee and was added to the House docket in March.

As more Americans work past age 65 (they're called working seniors at that point) and collect Social Security benefits to supplement their budgets, the harder this rule hits order, hard-working employees. And the effects sure look like discrimination based on income and age.

Consider three workers covered on their company's HSA-qualified plan - the only coverage that the firm offers. The company contributes $1,500 to each eligible enrollee:

·        Xavier, age 65, earns $120,000 annually. He's delaying his enrollment in Social Security to increase his monthly benefit when he does enroll. He collects the company's $1,500 contribution and can contribute another $3,650 to reduce his taxable income.

·        Yvonne, age 65, earns $40,000 annually. She began collecting Social Security benefits during the Covid-19 pandemic when she lost her job. She's automatically enrolled in Part A and thus can't receive the company's $1,500 contribution. Nor can she reduce her taxable income with her own contributions.

·        Zac, age 64, earns $40,000 annually. He too is collecting Social Security benefits. He's not eligible for Medicare, however, so he's not disqualified. He accepts the company's $1,500 contribution and deposits an additional $3,650 into his Health Savings Account.

Yvonne can't fund her Health Savings Account or accept a company contribution, whereas her co-workers can.

What's the difference between Yvonne and Xavier? They’re the same age and enrolled on the same plan. The difference: her much lower income, and the need to supplement her budget with Social Security benefits.

What's the difference between Yvonne and Zac? They have the same income and coverage. And both collect Social Security. The difference: age (and just one year!). Both collect Social Security, yet Zac can accept the company's contribution and deposit some of his salary (until the month before his 65th birthday, when his eligibility to fund a Health Savings Account ends). Yvonne can do neither.

When You Can Disenroll from Part A

There is a situation in which you can disenroll from Part A. But it's rare. If you're paying a premium for Part A coverage, you can complete and file Form CMS 1963 Request for Termination of Premium Part A, Part B, or Part B Immunosuppressive Drug Coverage.

Very few people qualify for this disenrollment because it applies to only people who pay a premium. If you (or your spouse) worked at least 40 qualifying quarters (10 years) and earned a minimal amount each quarter, your payroll taxes have prepaid your Part A premiums. Thus, you pay no premium for Part A, you're eligible to apply for "Termination of Premium [emphasis added] Part A." Period.

Action Plan

It's critically important that you start thinking about Social Security and Medicare decisions prior to age 62, not at age 65. The moment you begin to collect Social Security benefits, you've set the date that you're disqualified from funding your Health Savings Account due to your enrollment in Medicare. That date for most people is either

·        the month that they turn age 65 (if they collect Social Security benefits prior to their 65th birthday), OR

·        up to six months prior to submitting an application for Medicare benefits (if they enroll in Medicare after their 65th birthday).

If you're collecting Social Security benefits before age 65 and want to be HSA-eligible after you turn age 65, you can disenroll from Social Security. But you must repay all monthly benefits received. (This action effectively erases your participation, so that you receive a higher monthly benefit when you later apply.) This strategy works only if you're not yet age 65. Otherwise, you're auto-enrolled in Part A at age 65 and can't change your mind later, even if you disenroll from Social Security and repay all benefits received.

The Bottom Line

The intersection of Health Savings Accounts and Medicare is confusing. And no matter how effectively you navigate, you face limited choices. If your company offers only an HSA-qualified plan and you're collecting Social Security benefits on or after your 65th birthday, you face the least attractive feature of an HSA-qualified plan (a broad deductible) without the benefit of a tax-free account into which you and your employer can deposit contributions.

You can't control how many plans your company offers. But you can control when you enroll in Social Security and therefore Part A. It may not be practical to defer Social Security benefits. But be sure that you understand the implications of the timing of your signing up.

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HSA Monday Mythbuster is published every other week, alternating with HSA Question of the Week on Mondays. The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.